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Gary Wagner Uses Candlesticks to Measure Sentiment

Japanese candlesticks offer a “mathematical expression of psychological market sentiment” to trader Gary Wagner, who utilizes these Eastern technical indicators in conjunction with Western tools to actively trade for himself.

It took Wagner several years into the commodity business before he began utilizing Japanese candlesticks in his interpretation of the markets. After college, he entered the industry as a broker and around “1989-1990, FutureSource began displaying price movements over time with candlesticks. It looked interesting, but I didn’t know much about what they meant. I started doing a lot of research,” Wagner said.

Wagner stumbled upon a book entitled The Japanese Chart of Charts, by Seiki Shimizu, which he calls the “Rosetta Stone of every candlestick technician in the U.S … I read it and it was like these light bulbs started going off in my head,” Wagner explained.

“After it clicked in, my trading vastly improved. I started making money and my clients started making money,” Wagner said. Japanese candlesticks are constructed differently from a traditional Western bar chart. A traditional daily bar chart reveals a vertical bar, representing each day’s action. The bar chart reveals the session’s high, low and closing price; the latter is seen by a tic to the right of the bar.

However, Japanese candlestick charts are comprised of a rectangular section and two thin lines above or below the section.

According to Trading Applications of Japanese Candlesticks, by Gary Wagner and Brad Matheny, “The candle or pole line is defined as one complete cycle with an open, low, high and close. The thick part of the candle is known as the real body. The thin lines above and below the real body are the shadows and represent the high and low for that cycle … A white candle (empty) is created when the closing price is just above the opening price for the cycle. Black candles (full) are just the opposite-die opening price must be above the dosing price for the cycle.” However, Wagner utilizes Japanese candlestick charts in conjunction with traditional Western technical analysis.

“Utilizing candlesticks is a win-win situation for the Western technician. We use moving averages, stochastics, trendlines. But, one can usually obtain more information looking at a candlestick chart. The reason for that is that the Western technician puts his emphasis on the close to the close,” Wagner noted.

But candlesticks reveal “the relationship between the open and the close of that day. Dynamically, there is a battle going on each day-the candle reveals its outcome,” he explained.

The most important lesson Wagner he says he has learned as a trader is that the “market runs independently of whether you want it to go up or down … you can’t marry yourself to a position.”

“One has to have a systematic methodology that removes as much emotional content from the trade as possible,” Wagner continued. Additionally, traders “must predefine risk and reward,” he stressed.

Wagner has done this for himself via computer software he has developed called the Candlestick Forecaster. “I took all the trading techniques that I use and mimicked them with a computer,” he said.

“The best traders I’ve witnessed … are successful because they maximize upside potential when they are right and they get out quickly if they are wrong,” Wagner revealed.

Wagner admits that “fundamentals rule the market, but you can distill that in a mathematical way,” he says referring to candlesticks. “By removing myself from information overload of the fundamentals, I was able to glean a much more pristine view,” he explained.

Currently, Wagner looks to trade markets with “good liquidity and good open interest.” These will be “viable markets to trade using the (candlestick) technique,” he said. “I shy away from coffee and cotton … logistically you can get a huge amount of slippage … you have to have more caution with illiquid markets,” he explained. While Wagner started out as a day-trader, that changed about three to four years ago and now he has become a position trader.

Wagner credits the change in his trading style to an actual change in the nature of the markets themselves, which coincided with the emergence of large fund players and large institutional players in the futures arena.

“When the large institutional traders came in, they had such a voracious way of moving the markets because of the mass of orders,” Wagner explained. “I found it difficult from a computer to win because the risk reward changed. My stops didn’t hold.”

Now, Wagner believes the “most profitable way to trade is with the trend.”

Advice for the beginning futures trader: “Invest in education,” Wagner suggests. He says the new trader is “jumping into a shark-infested pool. In order to survive … you need good protection … and very large teeth. Staying power or stamina,” is important in order to succeed.